Overall assets return to positive territory

Luba Nikulina sees growth of alternatives as a factor in the rise of passive management.

Total assets run by leading passive money managers grew 9.9% in 2016 to $16.7 trillion, a faster rate than growth across the world's largest 500 money managers, the latest ranking by Willis Towers Watson PLC and Pensions & Investments shows.

The research on the world's 500 largest asset managers showed total assets under management grew 5.8% in the year ended Dec. 31, to $81.2 trillion. In 2015, assets under management fell for the first time since 2011, by 1.7% to $76.7 trillion.

The passive money managers' growth in 2016 compared with a 0.8% decline for 2015. Over 10 years, passive managers have seen their total assets grow at a compound annual growth rate of 9.2%. For the overall 500 firms in the ranking, the 10-year rate was 2.4%. A spokeswoman for Willis Towers Watson said the consultant "created a consistent sample which in our view consists of the most recognizable passive managers with a substantial amount of AUM invested in passively managed assets and which is representative of industry developments." She added that the list is internal.

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Overall, however, active strategies continued to take the dominant share of assets under management across the top 500, at $20.5 trillion, down 2.3% from 2015. Total passive assets grew 5.9% over the year to $5.6 trillion.

"Passive has definitely increased much faster than the average," said Luba Nikulina, London-based global head of manager research at Willis Towers Watson.

There are a number of well-known reasons for the growth of passive — such as pressure on fees, the ability to gain exposure in a cheaper way and the underperformance of active strategies — but Ms. Nikulina cited two key additional reasons.

"There has been significant appetite from asset owners to have a bit more control around the sorts of exposures that they have," said Ms. Nikulina. An asset owner looking to incorporate sustainability and environmental, social and governance factors into their exposures can use an ESG-exclusion index, for example.

The second reason is that factor investing and smart beta strategies might also be counted in the passive assets story. The 2016 research showed 5.5% of assets under management of the 500 largest managers was invested in factor-based strategies.

There may also be a relationship between the increase in passive assets and growth in allocations to alternatives. Alternatives assets under management grew 5.1% in 2016 to $2.5 trillion. Equities assets grew 4.1% to $18.5 trillion, and fixed-income assets grew 1.7% to $14.4 trillion.

"What we think is happening is investors are allocating to passive and with this they are lowering the overall fee drag, and they also lower the governance requirements in this area. When they release this fee and governance budget, they reallocate it not to active and traditional asset classes, but rather to more alternatives to make their capital work harder," said Ms. Nikulina.

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Currency impact noted

Within the top 500 firms, North America-based managers took a 58.4% share of total assets under management, with $47.4 trillion. That represented a 7.7% increase from 2015. Assets run by Europe-based managers, including the U.K., increased 2.8% to $25.8 trillion. However, U.K.-based firms saw their assets under management fall 4.5% to $6.3 trillion.

Ms. Nikulina attributed much of the North American firms' growth, as well as the U.K.'s decline in part, to the impact of currency. The pound sterling, for example, fell 16.3% in 2016 against the dollar.

"Probably half of the story if not more (regarding North American managers) is the dollar, and also growth of the economy," she said, as well as large passive managers being domiciled in the U.S. The S&P 500 index gained 11.96% in calendar 2016, compared to a 1.38% gain in 2015.

Along with the return to growth for the overall top 500 managers, the top 20 also fared well in 2016. Total assets under management for the 20 largest firms grew 6.7% to $34.3 trillion, and their share of the total pie grew to 42.3%, from 41.9% in 2015.

BlackRock (BLK) Inc. (BLK) remained in first place, with $5.15 trillion in assets as of Dec. 31, 2016. The firm's AUM as of Sept. 30, 2017, was $5.98 trillion, according to its latest quarterly update.

At the other end of the listing, the managers ranked 251 to 500 saw their assets under management grow 7.3% to $4.8 trillion. Their share of total assets also grew, to 5.9% from 5.8% in the 2015 ranking.

For smaller managers, the pace of growth is partly attributable to assets under management starting from a smaller base. Additionally "how we explain this is more appetite for alternatives and the niche strategies. I think we have already started seeing this effect a number of years ago, but this is confirmation of the same trend," added Ms. Nikulina.

She said the growth of the two sets of managers came "at the expense of the middle" ranking firms. The top 20 benefited from the growth in passive as well as consolidation among managers to gain scale and to "deal with regulatory costs."

Almost 60% of managers surveyed said they had experienced a moderate or significant increase in the level of regulatory oversight.

Another highlight of the research was analysis relating to the type of managers in the top 20. All of the managers in the top 10 were independent firms, up from nine in 2015, with
Nuveen, the investment management arm of TIAA, entering the top 20 in 20th place, with $881.7 billion in assets under management. The firm was acquired by TIAA in 2014. In the 2015 ranking, the firm took 22nd place with $854.3 billion in assets.

Falling out of the top 20 was HSBC Holdings PLC, which came 22nd in the 2016 ranking with $831 billion. In 2015 it was in 18th place, with $896 billion in assets under management.

Ms. Nikulina said over the past 10 years the number of independent managers in the top 20 has doubled. There are "understandable reasons" for a preference for an independent ownership model, such as regulatory impacts regarding bank ownership, she added.

Other findings

In other findings:

Among those surveyed, 60% said aggregate investment management fees had remained the same in 2016, while 7% noted a moderate increase. One-third said fees had moderately decreased over the year.

Sixty-two percent of managers reported a moderate or significant increase in resources deployed to technology and big data in 2016.

Notes:1 As of March 31, 2016;
2 As of June 30, 2017;
3 As of June 30, 2016;
4 As of Oct. 31, 2016;
5 As of May 31, 2017;
6 As of Jan. 31, 2017;
7 As of Sept. 30, 2016;
8 As of April 30, 2017;
9 As of March 31, 2017;
10 As of July 31, 2016